Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a.
Question:
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.
a. Wysocki Company is considering the purchase of new equipment that will speed up the process for extracting copper. The equipment will cost $3,600,000 and have a life of five years with no expected salvage value. The expected cash flows associated with the project are as follows:
b. Marlene Straithe is considering investing in one of the following two projects. Either project will require an investment of $75,000. The expected revenues less cash expenses for the two projects follow. Assume each project is depreciable.
c. Suppose that a project has an accounting rate of return of 30 percent (based on initial investment) and that the average net income of the project is $120,000.
d. Suppose that a project has an accounting rate of return of 50 percent and that the investment is $150,000.
Required:
1. Compute the ARR on the new equipment that Wysocki Company is considering.
2. Which project should Marlene Straithe choose based on the ARR? Notice that the payback period is the same for both investments (thus equally preferred). Unlike the payback period, explain why ARR correctly signals that one project should be preferred over the other.
3. How much did the company in scenario (c) invest in the project?
4. What is the average income earned by the project in scenario (d)?
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
Cornerstones of Managerial Accounting
ISBN: 978-0176530884
2nd Canadian edition
Authors: Maryanne M. Mowen, Don Hanson, Dan L. Heitger, David McConomy, Jeffrey Pittman